Understanding the concept of a beneficial owner is crucial for tax compliance and business responsibilities. Explore the complexities, legal implications, and importance of beneficial ownership in international business. Read our comprehensive guide on International Wealth for expert insights or book a session with our specialists to ensure a clear understanding.
A beneficial owner is a key concept when we are talking about responsibility and taxes. Entrepreneurs who start their business in an offshore jurisdiction often want to remain incognito. And this is possible to some extent: for example, there are jurisdictions where the names of beneficial owners are not disclosed to the wide public. However, most banks want to know who the beneficial owner really is before they open a corporate account.
If you are a beneficial owner, you will need to pay taxes on the income you get. With that in mind, some people try to play hide-and-seek with tax authorities not to disclose their real identity. You should know very well what you are doing, though: if you register an entity in a foreign jurisdiction, you may be off the radar of the local tax authorities, but you will be considered a beneficial owner according to the laws of the country where you live! When this is revealed, you may be subject to heavy fines.
This practically means that you will be on the safe side if you seek the advice of a competent specialist before setting up a company abroad. We would like to invite you to our portal called International Wealth to read a longer article called Who Is a Beneficial Owner and get clear on the matter – or book a session with our expert. A tip found on the Internet will not help in most cases as the situation may be absolutely different!
Why is the Notion So Confusing?
If you ask a financial specialist, an economist, an investor, and a bank employee to give you the definition of a beneficial owner, they will all give different answers as they will be based on their limited experience and knowledge! What is more, even if you collect and analyze all of these answers, they are unlikely to give you an ultimate clear picture.
One more thing to be taken into account is the mentality. For example, let’s take the people who live in developed and developing countries. The first cohort finds it absolutely normal to make up a will at the age of 25 to appoint a beneficiary who will manage their assets after their death. If we are talking about people in developing countries, they will find the term “beneficiary” strange in this respect, and they don’t usually take care of these things until it’s too late.
One more thing: a beneficial owner may be a person who directly or indirectly owns a business based in a foreign country. However, this may sound like a strange concept in countries where most people think that the director and beneficial owner should be the same person. However, if we look from an international point of view, appointing a director to perform some functions by a beneficial owner (who will simply get profit) is quite a legal way of asset management.
If you have a business and you don’t want to have problems with the tax authorities, read this short post, follow the link above to read the full text, or book a session with our experts to make all the concepts clear to you.
Contexts Where the Beneficial Owner is Important
Here are the areas where the concept of a beneficial owner is essential:
- Laws focused on fighting money laundering and financing of terrorism (AML/CFT).
- International legal framework that regulates these matters, including the efforts made by FATF and OECD, the two major international regulators.
- British company/trust laws define the beneficial owner as the title shareholder, the person who actually benefits from the shares (it may differ from the person who owns them), or the person who benefits from the assets held in the trust.
- DTTs (Double Taxation Treaties), where the beneficial owner is the actual income recipient.
Beneficial Owner and AML/CFT
According to EU laws, a beneficial owner is the one:
- Who controls the actions of another individual in a direct or indirect way
- In whose interests the activities are carried out
If we are talking about a legal entity, a beneficial owner is the person who:
- Owns the business structure
- Directly or indirectly influences the decisions made by voting, holding shares, having business interests, or in any other way.
Indirect ownership implies 25% + 1 share.
All EU-based legal entities are obliged to keep regularly updated information about beneficial owners (with a proper description of their participation share) and submit it to relevant authorities at first request.
The transparency of beneficial ownership is one of the major concerns when it comes to fighting corruption and bribery, money laundering, and financing terrorism, and FATF is taking active measures to ensure it.
Trust/Company Laws: Beneficial Ownership
Under the trust/company laws of the European countries, the beneficial owner is:
- The title shareholder
- The person on whose behalf a nominee shareholder acts
The relations between the beneficial owner and the nominee shareholder are required to be regulated by a special document called a declaration of trust, and it should protect the beneficial holder by restricting the nominee’s rights.
Let’s summarize: a beneficial owner is more than just a person that owns shares. It is a person who participates in business management, gives orders, and has the right to dispose of the company’s income. What is more, it is this person (and not the nominee) who is fully responsible for the activities of the legal entity.
As for the trust, we have a trustee who actually manages the assets and a beneficial owner who instructs the trustee what to do (and these instructions are documented in a trust deed). The beneficial owner has no right to actively manage the property held by the trust in any way.
The concept of a beneficial owner is multi-faceted, which is the reason why it may be hard to grasp. Follow the above link to read about the beneficial owner and DTTs and take a look at a more detailed version of the above post. Contact our experts if you need some explanations. If you let us help you with company registration abroad, we will give you all recommendations related to beneficial ownership to prevent any conflicts with tax authorities.
Register your company wisely!